Greece: The Deal & the Risks
I think at this stage, three things are worth noting:
1. For all the noise yesterday — a deal was never likely. Yesterday was not — as I repeatedly noted — a ‘hard’ deadline.
2. Counterintuitive as it seems, two meetings breaking up without an agreement and all the aggressive and unhelpful rhetoric on both sides may prove helpful. Both sides have won themselves credibility with their domestic audiences. Neither has obviously blinked.
3. The ECB’s actions two weeks ago in disallowing the use of Greek government bonds as collateral for borrowing but still supporting Greek banks through emergency liquids assistance (ELA), now looks smart. If they hadn’t done it then, they would have to now. And that would look like an escalation.
I think, odd as it may seem, a deal is close.
It would be based around the leaked Moscovici draft from yesterday.
Here’s how it would play out — Greece swallows some pride and asks for an extension.
The deal gives Greece 4–6 months of financing. Syriza hold back on implementing some of their manifesto and continue to run a chunky primary surplus.
In the next few months a wide ranging deal is negotiated.
Both sides have compromised.
There is also a fall back, less optimistic scenario that is still short far disaster: the bailout expires on the 28th and, in March, Greece requests a new one. That allows the talks to get off to a fresh start but may require capital controls in the interim to prevent a large deposit flow from Greek banks.
What are the risks? I can see 2.
The first is what I yesterday called the Troika ‘hard ball’ strategy. That requires the ECB to up the ante by pulling ELA support from Greek banks. In those circumstances, faced with a banking collapse, Greece could be pushed out of the euro.
The second might be termed the ‘Greek impasse’ scenario. In this case the ECB doesn’t escalate but Greece refuses to come back to the table. The bailout ends, deposit pressure leads to capital controls and the Greek government starts to run out if cash by the early summer at the latest. Uncertainty hammers the Greek economy.
Any of these scenarios could play out. But the odds of a compromise that keep Greece in the Eurozone and is facing saving for both sides remains high.
